The Cloud and Business Services: Key Trends and Directions Through 2015

Executive Summary

A research report prepared by:

July 6, 2011

The Cloud and Business Services: Key Trends and Directions Through 2015 Summary Introduction From Anyshore to Anywhere: A Market in Evolution Transitioning the Pillars of Services Delivery to the Cloud The Emergence of Cloud IT and Cloud Business Services Cloud IT Offerings Cloud Business Offerings Cloud Service Providers: Movers and Shakers User Impact Vendor Impact 1 2 4 5 8 9 10 13 16 17 3 6 9 12 14

TABLE OF CONTENTS

TABLE OF FIGURES

Figure 1: Services Delivery Management Evolution Figure 2: Traditional versus Cloud-enabled Services / Outsourcing Figure 3: The Saugatuck Cloud EcoStack Figure 4: Business Process Utility Characteristics Figure 5: Cloud Services Providers: Movers and Shakers
About this Report

This Cloud Business Services report takes a broad view concerning how the Services / Outsourcing market will evolve in response to the emergence and growth of Cloud IT and Cloud Business strategies. It provides a forward-looking view toward 2015 into how traditional services providers are reshaping their business models and service delivery, and how they will add value across the entire Cloud EcoStackTM including the emergence of BPaaS and BPUs. The Cloud is also helping non-traditional service providers emerge with unique horizontal and industry-specific value propositions highly tuned to specific buying centers. In the context of the past eight years of Saugatuck research into the Cloud, these trends illustrate not only where the Cloud is heading, but also where its been. Additional related research of interest is available to clients via our Research Library located at www.saugatucktechnology.com/browse-research/ (registration required). The following Saugatuck staff were instrumental in the development and publication of this report: Lead author: Robert McNeill, support by Bill McNee, with contributions from other members of the Saugatuck Team including Bruce Guptill, Mike West and Charlie Burns. About Saugatuck Technology Saugatuck Technology Inc. provides subscription research / advisory and strategy consulting services to senior business and IT executives, technology and software vendors, business / IT services providers, and investors. Our mission is to help our clients make better business decisions and create new business value through trusted and objective insights into the key market trends and emerging technologies driving real change in business computing. Over the last few years this has included a major focus on Software-as-a-Service (SaaS), Cloud Infrastructure, and Social Media, Mobility and Advanced Analytics among other key trends. Founded in 1999, Saugatuck is headquartered in Westport, CT with offices in Falmouth, MA and Santa Clara, CA and Frankfurt, Germany. For more information, please visit www.saugatucktechnology.com, or call +1.203.454.3900.
2011 Saugatuck Technology Inc.

July 6, 2011

The Cloud and Business Services: Key Trends and Directions Through 2015

SUMMARY
The IT and BPO services market is undergoing a period of deep structural change that is challenging the finely tuned market positions and business models of traditional services providers. Critical business change is occurring across supply chains, vendor / provider relationships, and customer relationships, due in part to the adoption of Cloud IT and Cloud Business models, but also the product of globalization and new sourcing innovations such as Business-Process-as-a-Service (BPaaS), Business Process Utilities (BPU) and Crowdsourcing. While we are seeing the traditional systems integration services market decline in terms of overall market opportunity, in its place new services and channel opportunities are being born as a result of the Cloud. Cloud services providers will flourish as they embrace Cloud IT and Cloud Business, serving both ISVs migrating to the Cloud and enterprises reshaping themselves. New Cloud Business services from non-traditional technology services providers (such as Volly from Pitney Bowes, or the ActiveHealth Management Collaborative Care Solution partnership with IBM) are driving innovation within the services provider market, increasing competition and providing user organizations with more choice. Traditional vendors and business models will experience a period of major transition and upheaval. The major established services players need to translate their IP into repeatable solutions. This will take serious investment which will be a significant challenge for many services providers, especially those who have grown on the backs of a labor arbitrage model. Offshore vendors in particular will be challenged as they do not have a culture of investment in repeatable solutions and this will have to change quickly. Creating solutions takes a greater understanding of client issues and will require more onsite visits. This will negatively affect the offshore providers as visa constraints tighten. For organizations reviewing the sourcing market, more complexity exists across the management disciplines of provider / offering assessments, selection, acquisition, transition and management.

2011 Saugatuck Technology Inc.

July 6, 2011

The Cloud and Business Services: Key Trends and Directions Through 2015

INTRODUCTION
Since 2003, Saugatuck has provided an ongoing assessment of what has become known as the Cloud Ecosystem. During this time, we have conducted dozens of comprehensive studies and published hundreds of Strategic Perspectives and Research Reports. Our methodology has evolved with the space and with the terminology used to describe it. What was once known as Pay As You Go IT Services became SaaS, and then, more recently, Cloud Computing. However, Cloud Computing is a widely misunderstood and somewhat ambiguous term that different audiences understand differently. At Saugatuck Technology we prefer to use the terms Cloud IT and Cloud Business, as they better reflect what is happening in the market. In 2009, we began delving deeper into how Cloud IT will impact the Services / Outsourcing market and how new Cloud Business Services are threatening the status quo. In the last year Saugatuck has interviewed more than 200 services providers, and interviewed or surveyed over 2,000 IT and business executives on their plans related to Cloud IT / Business Services adoption and how these will impact both supplier offerings and buyer preferences. Our analysis of this research has yielded the following Strategic Planning Positions for IT buyers, strategists, and providers:

Through 2013, Indian providers will be some of the most aggressive innovators in PaaS. The Indian services providers will take advantage of Cloud delivery models and client trust to break their linear headcount-to-revenue business models. Through 2013, pure-play Cloud consulting companies will continue to enjoy superior market growth. As Cloud business solution providers offer integration APIs, Cloud consultants/integrators will produce a wide range of adapters, services and toolkits to provide added value for clients. By 2013, non-traditional service providers with specific vertical and business IP will aggressively enter the Cloud Business Services market. Saugatucks position is that non-traditional services providers may be the logical front-runners in the race for extending niche vertical services from the Cloud to clients. By 2015, 50 percent of new outsourcing deals will be significantly Cloud enabled. Technology platforms (enabled by Cloud IT) have emerged as the newest value lever for services leadership and adoption will continue in 2011 at a rapid pace. By 2015, Business Process Utilities will emerge as the preferred means of consuming horizontal / commoditized BPO offerings such as F&A, Procurement, and HR and select vertical opportunities (e.g., Navitaire in airline reservations). Through 2015, the primary users of PaaS will be system integrators because of their aggregation of demand, greater resources and expertise, and openness to risk-taking absent in most enterprises.

2011 Saugatuck Technology Inc.

July 6, 2011

The Cloud and Business Services: Key Trends and Directions Through 2015

Figure 1: Service Delivery Management Evolution

Phase Late 90s Domestic (On-premises) Outsourcing Advantages

Disadvantages

Improve return-on-assets (ROA). Financial predictability through long term relationship Access to scarce technology resources in a time of technology boom Significant labor cost advantage during technology recession / dot.com bust for staff augmentation and modernizing legacy applications Provides a pool of available technology talent especially for US firms (English language) Round the clock development due to time differences Diversification away from India to tap into new markets for talent (Brazil Eastern EU, Canada) Smaller time-zone difference (US > Mexico, Costa Rica, Brazil) Better language / cultural support for non-English speaking countries (France > North Africa) Higher unemployment can yield broad talent supply Improved access to talent not suitable for offshore work (e.g., editorial services for bank report writing, call centers) Teleworking reduces infrastructure costs (real estate and operating) Everything as a Service often delivered from anywhere Consumerized IT that is easy to use Subscription based billing Improved agility and lower cost of entry to enterprise services Increased focus around vertical market niches Sourcing from Anywhere an open call for talent Lower cost, multiple option, possibilities for more innovation

Lacks significant cost advantage over status quo over long term Severance required for existing workers Significant transition and management costs including development of new skills for managing service providers Increasing transition and management costs Restriction on nature/type of jobs: language and cultural challenges Commercial, geopolitical, social and security risks and instability Time zone reduces ability to communicate real time Entry of multinationals developing captive centers (increasing competition for resources) Telecommunications infrastructure immaturity and lack of competition Insufficient scalability in some geographies to create and win from economies of scale Some nearshore centers not as mature from a process, quality or experience perspective Loss of management control for organizations that manage through observation rather than output Higher perceived security risks (identity management) Worker isolation from not being in the office and having access to management and other employees Lack of onsite support Organizations lack benchmarking re: commercial risk for both parties in construction of contracts Higher security risks due to loss of personal data Immature SLAs Market and provider immaturities Ability for business to bypass IT Security Immaturity of offerings Current fringe use is used only at the fringe (e.g. logo design, graphics, prototyping)
Source: Saugatuck Technology Inc.

Early 00s Offshoring

Mid 00s Nearshoring

Late 00s Homeshoring

Early 10s Cloud IT and Cloud Business

2015 onwards Crowdsourcing

2011 Saugatuck Technology Inc.

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2008 Saugatuck Technology Inc.

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